Talk about cogs within cogs. When eurozone sovereigns need cash, they turn to local banks, which use the bonds as collateral for three-year money from the European Central Bank, or to insurers. Banks once looked to insurers too for equity or – more often – debt funding. But now insurers have their own worries. They have mostly fared better than lenders, precisely because they are not structured like banks. The FTSE Eurofirst 300 insurance index has returned 70 per cent since its 2009 low, 40 percentage points more than banks. But the eurozone shambles is now punishing insurers for their sovereign and bank debt exposure.
Overall, solvency is not yet a concern. The European insurance supervisor has, however, highlighted the risk of a prolonged period of low interest rates and depressed equity prices. Low yields are a more acute problem for insurers in the core of the eurozone: depressed discount rates increase liabilities. Hence the introduction in Sweden of a floor on rates, since followed by Denmark and the Netherlands. More liabilities in turn force insurers to scramble for high-yield, long-duration assets.
If they have to be in the sector at all, investors are better off with the likes of Allianz of Germany, with a more diversified portfolio, or Dutch insurer Aegon. Both have lowish peripheral exposure. Allianz trades below peers at 1 times tangible book value, Aegon a third of that.
Email the Lex team in confidence at lex@ft.com
